AGGREGATE PLANNING
Aggregate planning is the process of planning the quantity and timing of output over the
intermediate range (often 3 to 18 months) by adjusting the production rate, employment,
inventory, and other controllable variables. Aggregate planning links long-range and short-range
planning activities. It is “aggregate” in the sense that the planning activities at this early stage are
concerned with homogeneous categories (families) such as gross volumes of products or
number of customers served. Master scheduling follows aggregate planning and expresses the
overall plan in terms of the amounts of specific end items to produce and dates to produce them.
It uses information from both forecasts and orders on hand, and it is the major control (driver)
of all production activities. Table 1 illustrates a simplified aggregate plan and master schedule.
Chase Strategy: If the production planner designed a plan to exactly match the forecast of
demand by adding or laying off employees to change the level of production, the planner would
be using a chase strategy. Some overtime or subcontracting might also be used, but no
inventories would be accumulated.
Level Production Strategy: The demand exceeds the average requirement in some months and
is below average in others. A production plan could be developed to produce at the constant rate
of 40 motors per month, accumulating inventory in months 2, 4, 5, and 7, and using that
inventory to meet the above average demands in months 3, 6, and 8. No initial inventory is
needed to prevent shortages. However, if there were shortages, some back orders could be
allowed under a level production, or inventory strategy.
Stable Work-Force Strategy: Suppose the firm has a stable work force capable of producing 36
motors per month on regular time. Production might go as high as 60 motors per month by using
overtime, but if demand falls to less than 36 motors per month, some workers would be idle.
Using overtime and idle time to meet demand would be employing a stable work-force strategy.
As part of this strategy, however, it seems likely that planners would build up some inventory
during what might otherwise be idle time periods.
MIXED STRATEGIES
The number of mixed strategy alternative production plans is almost limitless. However, the
realities of the situation will most likely limit the number of practical solutions. These can be
evaluated on a trial-and-error basis to find which plan best satisfies the requirements, taking
cost, employment policies, etc., into account.
A useful version of the linear-programming model (the transportation algorithm) views the
aggregate planning problem as one of allocating capacity (supply) to meet forecast requirements
(demand) where supply consists of the inventory on hand and units that can be produced using
regular time (RT), overtime (OT), and subcontracting (SC), etc. Demand consists of individual-
period requirements plus any desired ending inventory. Costs associated with producing units in
the given period or producing them and carrying them in inventory until a later period are
entered in the small boxes inside the cells in the matrix, as is done in the standard transportation
linear-programming format.
Capacity Options
A firm can choose from the following basic capacity (production) options:
1. Changing inventory levels: Managers can increase inventory during periods of low
demand to meet high demand in future periods. If this strategy is selected, costs
associated with storage, insurance, handling, obsolescence, pilferage, and capital invested
will increase. (These costs typically range from 15% to 40% of the value of an item
annually.) On the other hand, when the firm enters a period of increasing demand,
shortages can result in lost sales due to potentially longer lead times and poorer
customer service.
3. Varying production rates through overtime or idle time: It is sometimes possible to keep a
constant workforce while varying working hours, cutting back the number of hours
worked when demand is low and increasing them when it rises. Yet when demand is on a
large upswing, there is a limit on how much overtime is realistic. Overtime pay requires
more money, and too much overtime can wear workers down to the point that overall
productivity drops off. Overtime also implies the increased overhead needed to keep a
facility open. On the other hand, when there is a period of decreased demand, the
company must somehow absorb workers’ idle time—usually a difficult process.
5. Using part-time workers: Especially in the service sector, part-time workers can fill
unskilled labor needs. This practice is common in restaurants, retail stores, and
supermarkets.
Demand Options
1. Influencing demand: When demand is low, a company can try to increase demand through
advertising, promotion, personal selling, and price cuts. Airlines and hotels have long
offered weekend discounts and off-season rates; telephone companies charge less at
night; some colleges give discounts to senior citizens; and air conditioners are least
expensive in winter. However, even special advertising, promotions, selling, and pricing
are not always able to balance demand with production capacity.
2. Back ordering during high-demand periods: Back orders are orders for goods or services
that a firm accepts but is unable (either on purpose or by chance) to fill at the moment. If
customers are willing to wait without loss of their goodwill or order, back ordering is a
possible strategy. Many firms back order, but the approach often results in lost sales.
For most firms, neither a chase strategy nor a level strategy is likely to prove ideal, so a
combination of the eight options (called a mixed strategy) must be investigated to achieve
minimum cost. However, because there are a huge number of possible mixed strategies,
managers find that aggregate planning can be a challenging task. Finding the one “optimal” plan
is not always possible. Indeed, some companies have no formal aggregate planning process:
They use the same plan from year to year, making adjustments up or down just enough to fit the
new annual demand. This method certainly does not provide much flexibility, and if the original
plan was suboptimal, the entire production process will be locked into suboptimal performance.
Controlling the cost of labor in service firms is critical. Successful techniques include:
1. Accurate scheduling of labor-hours to assure quick response to customer demand
2. An on-call labor resource that can be added or deleted to meet unexpected demand
3. Flexibility of individual worker skills that permits reallocation of available labor
4. Flexibility in rate of output or hours of work to meet changing demand
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